Multinational Business Finance, Sixteenth Edition
David K. Eiteman, Arthur I. Stonehill and Michael H. Moffett
Contents
PART 1 Global Financial Environment 23
Chapter 1 Multinational Financial Management: Opportunities and Challenges 24
1.1 The Global Financial Marketplace 25
GLOBAL FINANCE IN PRACTICE 1.1 Exchange Rate Quotations 28
GLOBAL FINANCE IN PRACTICE 1.2 Why Don’t African Countries Undervalue Their Currencies? 32
1.2 The Theory of Comparative Advantage 32
1.3 What Is Different About International Financial Management? 34
GLOBAL FINANCE IN PRACTICE 1.3 Corporate Responsibility and Corporate Sustainability 36
1.4 The Globalization Process 36
Summary Points 40
MINI-CASE: Global Fintech 40
Questions 43
Problems 44
Chapter
2 International Monetary System 49
2.1 History of the International Monetary System 50
GLOBAL FINANCE IN PRACTICE 2.1 The “Gold Bloc”—The Last Stand of Gold Standard 52
GLOBAL FINANCE IN PRACTICE 2.2 Britain Leaves the Gold Standard: Press Notice (Excerpts of
September 19, 1931) 53
GLOBAL FINANCE IN PRACTICE 2.3 Hammering out an Agreement at Bretton Woods 54
2.2 Fixed versus Flexible Exchange Rates 60
2.3 The Impossible Trinity 61
2.4 A Single Currency for Europe: The Euro 63
2.5 Internationalization of the Chinese RMB 66
2.6 Emerging Markets and Regime Choices 69
GLOBAL FINANCE IN PRACTICE 2.4 Nigeria Fights Currency Exchange Innovation 73
Summary Points 74
MINI-CASE: The Promise of the Digital Yuan 74
Questions 77
Problems 78
Chapter 3 The Balance of Payments 81
3.1 Fundamentals of BOP Accounting 82
3.2 The Accounts of the Balance of Payments 84
GLOBAL FINANCE IN PRACTICE 3.1 Inward Foreign Direct Investment in the Year of COVID 88
GLOBAL FINANCE IN PRACTICE 3.2 A Country’s Net International Investment Position (NIIP) 89
3.3 BOP Impacts on Key Macroeconomic Rates 92
3.4 Trade Balances and Exchange Rates 94
GLOBAL FINANCE IN PRACTICE 3.3 Do Trade Flows No Longer Follow the Theory? 96
3.5 Capital Mobility 96
GLOBAL FINANCE IN PRACTICE 3.4 Chinese Regulatory Bureaucracy as a Capital Control 101
Summary Points 102
MINI-CASE: Global Remittances—Contributions of the Invisible 103
Questions 107
Problems 108
Chapter 4 Financial Goals, Corporate Governance, and the Market
for Corporate Control 111
4.1 Business Ownership 112
GLOBAL FINANCE IN PRACTICE 4.1 Historical Origins of the Modern Corporation 115
GLOBAL FINANCE IN PRACTICE 4.2 Structural Ownership Differences Across the World 116
4.2 The Corporate Objective? 117
GLOBAL FINANCE IN PRACTICE 4.3 Stakeholder Capitalism Metrics: The Four Ps 121
4.3 Corporate Governance 125
GLOBAL FINANCE IN PRACTICE 4.4 Italian Cross-Shareholding and the End of the Salatto Buono 127
GLOBAL FINANCE IN PRACTICE 4.5 Volkswagen’s Governance and Diesel Gate 130
4.4 The Market for Corporate Control 131
Summary Points 135
MINI-CASE: Toshiba’s Failing Corporate Governance 136
Questions 140
Problems 140
PART 2 Foreign Exchange Theory and Markets 145
Chapter 5 The Foreign Exchange Market 146
5.1 Functions of the Foreign Exchange Market 146
5.2 Structure of the Foreign Exchange Market 147
GLOBAL FINANCE IN PRACTICE 5.1 The Twilight Hour in Global FX Trading 148
GLOBAL FINANCE IN PRACTICE 5.2 Bankhaus Herstatt and Herstatt Risk 150
GLOBAL FINANCE IN PRACTICE 5.3 Black Wednesday: The 1992 Sterling Crisis 155
5.3 Transactions in the Foreign Exchange Market 156
5.4 Foreign Exchange Rates and Quotations 161
GLOBAL FINANCE IN PRACTICE 5.4 The Rocketing Swiss Franc 169
Summary Points 170
MINI-CASE: Iceland: A Small Country in a Global Crisis 171
Questions 175
Problems 176
Chapter 6 International Parity Conditions 180
6.1 Prices and Exchange Rates 181
GLOBAL FINANCE IN PRACTICE 6.1 Lies, Damn Lies, and Statistics: Uber Fare as the Basis for Exchange Rate Parity 183
6.2 Interest Rates and Exchange Rates 187
GLOBAL FINANCE IN PRACTICE 6.2 Are Foreign Capital Inflow and Interest Rate Directly Related? 189
GLOBAL FINANCE IN PRACTICE 6.3 Global Money Market Interest Rates, 1986–2021 192
6.3 Forward Rate as an Unbiased Predictor of the Future Spot Rate 197
GLOBAL FINANCE IN PRACTICE 6.4 Hungarian Mortgage 198
6.4 Prices, Interest Rates, and Exchange Rates in Equilibrium 199
Summary Points 201
MINI-CASE: Mrs. Watanabe and the Japanese Yen Carry Trade 201
Questions 204
Problems 205
APPENDIX: An Algebraic Primer to International Parity Conditions 211
Chapter 7 Foreign Currency Derivatives: Futures and Options 214
7.1 Foreign Currency Futures 215
7.2 Foreign Currency Options 217
GLOBAL FINANCE IN PRACTICE 7.1 Currency Options and Lufthansa 223
GLOBAL FINANCE IN PRACTICE 7.2 Exotic Options: Caveat Emptor 225
7.3 Option Pricing and Valuation 226
GLOBAL FINANCE IN PRACTICE 7.3 The New Zealand Kiwi and Andrew Krieger 227
7.4 Currency Option Pricing Sensitivity 228
GLOBAL FINANCE IN PRACTICE 7.4 GM and Fiat’s Put Option 234
Summary Points 234
MINI-CASE: The Ups and Downs of Volatility 235
Questions 239
Problems 240
APPENDIX: Currency Option Pricing Theory 243
Chapter 8 Interest Rate Risk and Swaps 245
8.1 Interest Rate Foundations 246
8.2 The Cost of Debt 248
GLOBAL FINANCE IN PRACTICE 8.1 You Will Be a Millionaire in Indonesia: The Impact of South Asian Currency Crisis 251
8.3 Interest Rate Risk 254
8.4 Interest Rate Futures and Forward Rate Agreements 257
8.5 Interest Rate Swaps 258
GLOBAL FINANCE IN PRACTICE 8.2 Procter & Gamble and Bankers Trust 266
Summary Points 267
MINI-CASE: Replacing LIBOR 267
Questions
274
Problems 274
Chapter 9 Foreign Exchange Rate Determination and Intervention 279
9.1 Exchange Rate Determination: The Theoretical Thread 280
GLOBAL FINANCE IN PRACTICE 9.1 Technical Analysis of the Japanese Yen-U.S. Dollar Exchange Rate
(January 2011–February 2014) 283
9.2 Currency Market Intervention 284
GLOBAL FINANCE IN PRACTICE 9.2 Coordinated Intervention: The Lost Decade of Japan 287
GLOBAL FINANCE IN PRACTICE 9.3 Rules of Thumb for Effective Intervention 289
GLOBAL FINANCE IN PRACTICE 9.4 The European Monetary System’s “Snake in a Tunnel” 291
9.3 Disequilibrium: Exchange Rates in Emerging Markets 291
9.4 Currency Forecasting in Practice 296
Summary Points 301
MINI-CASE: Is China a Currency Manipulator? 301
Questions 304
Problems 305
PART 3 Foreign Exchange Exposure 311
Chapter 10 Transaction Exposure 312
10.1 Types of Foreign Exchange Exposure 312
10.2 Why Hedge? 314
GLOBAL FINANCE IN PRACTICE 10.1 Hedging and the Samsung Group 316
10.3 Transaction Exposure 316
10.4 Transaction Exposure Management 318
GLOBAL FINANCE IN PRACTICE 10.2 Forward Rates and the Cost of Hedging 325
10.5 Transaction Exposure Management in Practice 327
GLOBAL FINANCE IN PRACTICE 10.3 Why Intra-Company Hedging Makes Sense 329
Summary Points 331
MINI-CASE: GraysonChung’s FX Exposure 331
Questions 336
Problems 337
APPENDIX A: Complex Option Hedges 343
APPENDIX B: The Optimal Hedge Ratio and Hedge Effectiveness 351
Chapter 11 Translation Exposure 353
11.1 Overview of Translation 354
GLOBAL FINANCE IN PRACTICE 11.1 Functional Currency and Management Performance 357
11.2 Translation Methods 357
11.3 Aidan Corporation’s Translation Exposure 360
GLOBAL FINANCE IN PRACTICE 11.2 Value of a Foreign Subsidiary: Tata Motors and Jaguar Land Rover 364
11.4 Managing Translation Exposure 364
GLOBAL FINANCE IN PRACTICE 11.3 Foreign Currency Hedge Accounting 366
Summary Points 370
MINI-CASE: Electrolux of Sweden’s Currency Management 370
Questions 375
Problems 376
Chapter 12 Operating Exposure 378
12.1 A Multinational’s Operating Exposure 378
GLOBAL FINANCE IN PRACTICE 12.1 Operating Exposure: Jet2.com 381
12.2 Measuring Operating Exposure 382
GLOBAL FINANCE IN PRACTICE 12.2 The Misunderstood Equation 383
12.3 Strategic Management of Operating Exposure 383
GLOBAL
FINANCE IN PRACTICE 12.3 The United Kingdom and Europe: Trans-Channel Currency Shifts 385
12.4 Proactive Management of Operating Exposure 386
GLOBAL FINANCE IN PRACTICE 12.4 Hedging Hogs: Risk Sharing at Harley-Davidson 388
GLOBAL FINANCE IN PRACTICE 12.5 Do Fixed Exchange Rates Increase Corporate Currency
Risk in Emerging Markets? 391
Summary Points 392
MINI-CASE: Brexit and Rolls-Royce 392
Questions 397
Problems 397
APPENDIX: Measuring Operating Exposure: Aidan Turkey 402
PART 4 Financing the Global Firm 407
Chapter 13 Global Cost and Availability of Capital 408
13.1 Financial Globalization and Strategy 408
GLOBAL FINANCE IN PRACTICE 13.1 Brexit and the Cost of Capital 410
13.2 International Portfolio Theory and Diversification 411
13.3 The Role of International Portfolio Investors 418
GLOBAL FINANCE IN PRACTICE 13.2 Emerging Market Growth Companies—IPOs and
Corporate Governance 419
GLOBAL FINANCE IN PRACTICE 13.3 Culture, Religion, Law, and Financial Behavior 422
13.4 The Cost of Capital for MNEs Compared to Domestic Firms 423
13.5 Illustrative Case: Novo Industri A/S (Novo) 426
Summary Points 430
MINI-CASE: The Recapitalization of Saudi Aramco 431
Questions 436
Problems 436
Chapter 14 Funding the Multinational Firm 441
14.1 Designing a Strategy to Source Capital Globally 442
14.2 Optimal Financial Structure 443
14.3 Raising Equity Globally 446
GLOBAL FINANCE IN PRACTICE 14.1 Saudi Aramco’s IPO Valuation 448
GLOBAL FINANCE IN PRACTICE 14.2 Global Equity Listings 450
14.4 Depositary Receipts 450
14.5 Private Placement 455
14.6 Raising Debt Globally 456
GLOBAL FINANCE IN PRACTICE 14.3 Islamic Finance 458
14.7 Financing Foreign Subsidiaries 459
Summary Points 463
MINI-CASE: Cemex’s Debt Dilemma 463
Questions 470
Problems 470
Chapter 15 Multinational Tax Management 474
15.1 Tax Principles and Practices 475
15.2 Multinational Tax Management 482
GLOBAL FINANCE IN PRACTICE 15.1 Profit Repatriation and Policies 484
GLOBAL FINANCE IN PRACTICE 15.2 HP’s Offshore Cash and Staggered Loan Program 492
15.3 Global Tax Competitiveness 493
15.4 U.S. Tax Law Change in 2017–2018 494
Summary Points 497
MINI-CASE: The Google Tax 498
Questions
501
Problems 502
Chapter 16 International Trade Finance 505
16.1 The Trade Relationship 505
GLOBAL FINANCE IN PRACTICE 16.1 Trade Finance Gains and Losses from the Global Pandemic 510
16.2 Key Documents 510
GLOBAL FINANCE IN PRACTICE 16.2 Florence—The Birthplace of Trade Financing 513
16.3 Government Programs to Help Finance Exports 517
16.4 Trade Financing Alternatives 519
GLOBAL FINANCE IN PRACTICE 16.3 Factoring in Practice 520
16.5 Forfaiting 522
Summary Points 524
MINI-CASE: Crosswell International and Brazil 525
Questions 528
Problems 528
PART 5 Foreign Investments and Investment Analysis 531
Chapter 17 Foreign Direct Investment and Political Risk 532
17.1 The Foreign Direct Investment Decision 532
17.2 Structural Choices for Foreign Market Entry 533
GLOBAL FINANCE IN PRACTICE 17.1 Joint Venture to Wholly Owned Subsidiary 538
17.3 Political Risk: Definition and Classification 539
GLOBAL FINANCE IN PRACTICE 17.2 The Chinese Belt and Road Initiative (BRI) and Debt-Trap Diplomacy 540
17.4 Financial Impacts of Political Risk 542
17.5 Political Risk Mitigation 546
GLOBAL FINANCE IN PRACTICE 17.3 Selective Examples of Expropriation and Nationalization across the Globe 547
GLOBAL FINANCE IN PRACTICE 17.4 U.S. Financial Sanctions on Iran 549
GLOBAL FINANCE IN PRACTICE 17.5 Structuring Incentives in Foreign Direct Investments 552
Summary Points 553
MINI-CASE: Argentina and the Vulture Funds 553
Questions 558
Chapter 18 Multinational Capital Budgeting and Cross-Border Acquisitions 560
18.1 Complexities of Budgeting for a Foreign Project 561
18.2 Illustrative Case: Cemex Enters Indonesia 564
GLOBAL FINANCE IN PRACTICE 18.1 Regulatory Strategy Towards Capital Controls 574
18.3 Real Option Analysis 576
18.4 Project Financing 577
18.5 Cross-Border Mergers and Acquisitions 578
GLOBAL FINANCE IN PRACTICE 18.2 Values Change: GE Appliances and Electrolux 580
GLOBAL FINANCE IN PRACTICE 18.3 Statoil of Norway’s Acquisition of Esso of Sweden 584
Summary Points 584
MINI-CASE: Mittal’s Hostile Acquisition of Arcelor 585
Questions 590
Problems 591
Answers to Selected End-of-Chapter Problems A-1
Glossary G-1
Index I-1
Appendix: Currencies of the World I-16